LPA Key Terms
The Limited Partnership Agreement and the provisions that define GP-LP economics and governance
~20 min read
The Limited Partnership Agreement (LPA) is the foundational legal document that governs a PE fund. It is the contract between the General Partner and every Limited Partner, and it defines everything that matters: how capital is called, how profits are split, what the GP can and cannot do, and what happens when things go wrong. If the fund's strategy is its brain, the LPA is its skeleton. Every economic term, governance right, and protective provision flows from this document.
LPAs for large funds can run 200+ pages of dense legal language. But the commercially important provisions fall into a handful of categories that every PE professional should understand. In this lesson, we will walk through the key terms that show up in virtually every LPA negotiation: the distribution waterfall, key-person provisions, no-fault divorce rights, GP commitment requirements, removal provisions, and investment period mechanics.
Why the LPA Matters
The LPA is not just a legal formality. It is the single document that determines how billions of dollars flow between GPs and LPs. Large institutional LPs (pension funds, sovereign wealth funds) negotiate LPA terms aggressively because the difference between a GP-friendly and LP-friendly waterfall structure can mean tens of millions of dollars over the life of a fund. The Institutional Limited Partners Association (ILPA) publishes model LPA provisions that serve as a baseline for LP negotiations, and most large LPs maintain internal legal teams dedicated to reviewing and redlining LPA drafts.
Standard Distribution Waterfall (European / Whole-Fund)
Return of Capital
LPs receive back 100% of their contributed capital (all capital calls made to date). No profit split occurs at this stage.
Preferred Return
LPs receive a preferred return (typically 8% compounded annually) on their contributed capital. This hurdle must be fully satisfied before the GP earns any carry.
GP Catch-Up
The GP receives 100% (or sometimes 80%) of subsequent distributions until the GP has received its target carry percentage (typically 20%) of all cumulative profits distributed so far.
Carried Interest Split
Remaining profits are split 80/20 between LPs and the GP. This 80/20 split continues for all subsequent distributions after the catch-up is complete.
Return of Capital
LPs receive back 100% of their contributed capital (all capital calls made to date). No profit split occurs at this stage.
Preferred Return
LPs receive a preferred return (typically 8% compounded annually) on their contributed capital. This hurdle must be fully satisfied before the GP earns any carry.
GP Catch-Up
The GP receives 100% (or sometimes 80%) of subsequent distributions until the GP has received its target carry percentage (typically 20%) of all cumulative profits distributed so far.
Carried Interest Split
Remaining profits are split 80/20 between LPs and the GP. This 80/20 split continues for all subsequent distributions after the catch-up is complete.
| European (Whole-Fund) | American (Deal-by-Deal) | |
|---|---|---|
| Carry calculation basis | All contributed capital must be returned before any carry is paid | Carry is calculated and paid on each realized deal individually |
| Timing of GP carry | Delayed until later in the fund's life when multiple exits have occurred | GP receives carry earlier, as soon as a profitable deal exits |
| LP protection | Stronger. LPs are fully made whole before the GP earns carry | Weaker. GP may earn carry on early winners even if later deals lose money |
| Clawback risk | Lower. The whole-fund structure reduces the chance of over-distributed carry | Higher. The GP may need to return carry at fund wind-down if overall returns fall short |
| Market prevalence | Standard in Europe and increasingly common in the U.S. | Historically common in the U.S., now declining among institutional LPs |
Key-Person Clause
The key-person clause is one of the most important governance provisions in an LPA. It identifies specific named individuals at the GP (typically the founder and one or two senior partners) whose continued involvement is essential to the fund's investment strategy. If a named key person leaves the firm, is incapacitated, or reduces their time commitment below a specified threshold (usually 50-75% of business time), the key-person event is triggered.
When triggered, the consequences are significant: the investment period is typically suspended, meaning the GP cannot make new investments or call capital for new deals until the issue is resolved. LPs may gain the right to vote on whether to terminate the fund or allow the GP to propose a replacement. Key-person provisions protect LPs from the risk of committing to a fund based on a specific team's track record, only to have that team depart.
No-Fault Divorce
A no-fault divorce clause gives LPs the right to terminate the GP without needing to prove cause (fraud, gross negligence, or willful misconduct). Typically, a supermajority of LPs (66-75% by commitment) must vote to remove the GP. This is the nuclear option and is rarely exercised, but its existence gives LPs meaningful leverage in disputes.
The threshold matters: a 50% threshold makes removal relatively easy and is GP-unfriendly, while a 75% threshold makes removal very difficult because it requires near-unanimous LP agreement. Most LPAs settle on a 66.7% threshold as a compromise.
GP Commitment
The GP commitment is the amount of capital the GP invests in its own fund alongside its LPs. The industry standard is 1-3% of total fund commitments, though some GPs commit more as a signal of confidence. For a $5 billion fund, a 2% GP commitment means the partners are personally investing $100 million. This is not a token amount.
The GP commitment serves an alignment function: it ensures that the people making investment decisions have meaningful personal capital at risk. LPs view the GP commitment as a signal of conviction. A GP that commits less than 1% may face skepticism during fundraising.
Investment Period and Extensions
The investment period (typically 5 years from the final close) is the window during which the GP can make new investments and call capital. After it expires, the GP can only make follow-on investments in existing portfolio companies (and sometimes cannot call new capital at all). Some LPAs allow the GP to request a one-year extension with LP consent, typically requiring approval from a majority or supermajority of LPs.
Removal Provisions
Beyond no-fault divorce, most LPAs include 'for cause' removal provisions. These allow LPs to remove the GP if the GP commits fraud, gross negligence, willful misconduct, or a material breach of the LPA. For-cause removal typically requires a lower voting threshold (50% or simple majority) and may trigger forfeiture of the GP's unvested carry. The distinction between 'cause' and 'no-fault' removal is a heavily negotiated point in every LPA.
Key-Person Trigger: Bain Capital's Leadership Transition
When a senior partner departs a PE firm, the key-person clause becomes immediately relevant. Consider the broader industry pattern: between 2015 and 2024, multiple large PE firms experienced leadership transitions (Bain Capital, Carlyle, TPG). In each case, LPs scrutinized whether the departing individuals were named key persons in existing fund LPAs. At Carlyle, the departure of co-founders David Rubenstein, Bill Conway, and Daniel D'Aniello from active deal-making roles raised questions about key-person triggers in existing fund agreements. Carlyle managed the transition by ensuring that next-generation leaders were already named in newer fund LPAs and by proactively communicating succession plans to LPs. This illustrates why key-person provisions are not theoretical: they directly affect fund operations when leadership changes occur.
PitchBook; Carlyle Group public filings
Quiz: LPA Key Terms
6 questions · ~3 min